What To Expect From RBA Rate Decision

The Aussie is set to be among the most volatile currencies this week, starting off with the interest rate decision from the RBA.

A large number of analysts are projecting a rate cut as soon as this meeting. But, that doesn’t mean the notoriously conservative bank is about to pull the trigger. If it does, though, it will be in the middle of an election.

On the other hand, the last time interest rates were in this range, the bank did cut rates. A rate cut could significantly help out the faltering housing situation in Australia by reducing the cost of home loans.

What’s Coming Up

Ahead of the rate decision, we have a series of economic data which is also important to the market. The barrage of data later today or early in the morning tomorrow is likely to set the course for the week. On Tuesday at 03:30 CET (or Monday at 21:30 EST) we have the release of the trade balance and retail sales.

Normally the trade balance and retail sales data are more than capable of moving the market significantly on their own. But, with the market focused on the RBA decision, their effect could be muted or drowned out by a bigger move later in the day. Nevertheless, they are important factors to consider in trading.

Trade Balance

Australia’s trade balance has been breaking new records over the last couple of months. And high iron ore prices are supporting it. Last month’s result was way above expectations, and projections this time around are even higher: AUD5.39B compared to AUD4.80B last month.

Commodity prices in Australia increased by a further 0.9% last month, compared to a 0.8% increase the prior. This shows that exports are still getting a good price boost, led by the largest export, iron ore.

Iron ore broke above $90.00/ton and stayed up there for most of April, registering $93.79 at the close of the month. The trade balance has been supported by burgeoning exports and a drop off in demand, especially for consumer products. This is likely a result of the economic situation.

Retail Sales

We can expect retail sales growth to slow a bit to 0.7% monthly over the 0.8% registered prior. However, this is still a positive indicator and above the average that’s been registered for the last year or so.

Arguments in favor of holding off the interest rate include the argument concerning retail sales. While inflation isn’t as robust, consumers are still buying. That’s a sign the economy is still in good stead, and the RBA might be willing to hold out another month to see if the data returns to normal.

The Interest Rate Decision

The decision will be coming out at 06:30 CET (or 00:30 EST.) Most analysts are saying there is about a 50/50 chance that the bank will cut rates. Whether they do or not, the market will be paying close attention to the rate statement. That is to either understand why there was a change or to calibrate the dovish tone of the statement if the bank chooses to hold and “jawbone” the market.

Prior to the release of the CPI data, there was a pretty strong consensus that there wouldn’t be a change in the rate for quite some time. Now, there is talk of up to two rate cuts this year. However, the market often gets ahead of itself and we shouldn’t forget that the RBA has a reputation for not making sudden moves.

The uncertainty of a situation like this maximizes the potential for a strong market reaction. Since there isn’t a consensus on what will happen, it’s hard for the market to price anything in. A cut would likely send the AUD tumbling, whereas a hold would strengthen the currency despite disappointing equity markets.